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The former Fed chairman walked through some of the basics of the economy, including Stewart’s straightforward question: “Why do we have a Fed? Why do we have someone adjusting the rates if we’re a free-market society?”

Greenspan: “You’re raising a very fundamental question.”

Stewart: “I am? Should I leave?”

Greenspan: “No. Stay for a while. Since you got your Emmy, you’re qualified.”

Stewart quickly forced Greenspan to defend big investors and hedge funds. “It seems to me that we favor investment, but we don’t favor work,” Stewart said. “The vast majority of people work — they pay payroll taxes, and they use banks. And then there’s this whole other world, of hedge funds and short-betting and — it seems like craps. And they keep saying, no no, no, don’t worry about it, it’s free market. That’s why we live in much bigger houses. But it really isn’t. It’s the Fed, or some other thing, no?”

Greenspan: “I think you better re-read my book…. What a sound money system does is to stabilize all the elements in it, and reduces the uncertainty that people confront. And the one thing all human beings do when they are confronted with uncertainty is pull back, withdraw, disengage, and that means economic activity, which is really dealing with people, just goes straight down.”

In a straightforward definition of market bubbles, Greenspan explained how euphoria leads to confidence “that everything is terrific” before a sudden realization that the good times won’t last.

Greenspan: “I’ve been dealing with these big mathematical models of forecasting the economy, and I’m looking at what’s going on in the last few weeks. … If I could figure out a way to determine whether or not people are more fearful or changing to more euphoric, and have a third way of figuring out which of the two things are working, I don’t need any of this other stuff. I could forecast the economy better than any way I know.

“The trouble is that we can’t figure that out. I’ve been in the forecasting business for 50 years. … I’m no better than I ever was, and nobody else is. Forecasting 50 years ago was as good or as bad as it is today. And the reason is that human nature hasn’t changed. We can’t improve ourselves.”